How To Use The Moving Average To Analyze Stocks

The moving average is one of the simplest tools in technical analysis. It is also one of the best trend following indicators that you can use. The moving average is the average price of the stock over a period of time. For example, a 50 day moving average will be the average price of the stock for the last 50 days. They are updated daily so when you plot it on the chart, it will form a line that smooths the price data.

There are many types of moving average. They include the simple moving average, the exponential moving average and the weighted moving average. I like to use the simple moving average and it is a staple on my charts.

The 3 moving averages that I use are:

  • The 20 day moving average
  • The 50 day moving average
  • The 200 day moving average

The chart above shows the S&P 500 Index with its 20, 50 and 200 MA. To a beginner, the moving averages mean nothing. But to a trained professional, this stock chart tells a lot of things about the health of the stock market:

  1. The market is in a very healthy short term uptrend
  2. The market is in a very healthy mid term uptrend
  3. The market is in a long term uptrend
  4. The market is in a very strong bull uptrend
  5. This is the time to buy breakouts
  6. This is the time to focus on buying the dips
  7. An investor can afford to hold a stock longer

The 20 Day Moving Average

The 20 MA is the shorter period among the 3 moving averages. I use it to determine the short term strength of a stock.

  • A stock that is above its rising 20 MA is considered to be in a short term uptrend
  • If a stock drops below its 20 MA, it is considered to be in a short term correction
  • If you like to trade bullish momentum stocks, make sure you choose stocks that are above its rising 20 MA

In the chart above, you can see how the 20 MA pointed out the short term uptrends and correction periods for Apple's stock.

The 50 Day Moving Average

The 50 MA shows the strength and health of a stock in the medium term. This MA is watched by almost all investors and traders. That's why it is called a major moving average.

  • A stock  that is above its rising 50 MA is considered to be in a mid term uptrend
  • A stock that is below its 50 MA is considered to be unhealthy and therefore not a good candidate for bullish momentum moves
  • A stock that drops below its 50 MA and does not move back up quickly is unfit to be held on

The 200 Day Moving Average

The 200 MA is perhaps the most important moving average. Besides the 50 MA, the 200 MA is watched by almost all investors and traders. It has such a big following and therefore it is also known as a major moving average.

The 200 MA is the final line between what is a good stock and what is rubbish. Most investors won't even touch a stock that is below its 200 MA.

  • A stock that is above its rising 200 MA is considered to be in a long term uptrend
  • A stock that is below its 200 MA is considered very bad and you should not even buy the stock

Only Buy Stocks That Are Above Their Rising 50 And 200 MA

An investor should always look at a stock's 50 MA and 200 MA. Only buy stocks that are above their rising 50 and 200 MA. Never buy a stock that is below its 50 and 200 MA.

Avoid Stocks That Are Below Its Declining 50 and 200 MA

If you see a stock that is below its declining 50 and 200 MA, stay far away from it. Trying to bottom fish and buy this stock is like trying to catch a falling knife.

  • If you like this article, consider starting the Stock Market Course. It is free and jam packed with great information for newbies.
  • Want to have updates on the financial markets? Join my Telegram Channel. Dstockmarket.com Channel.
  • Help support this page and press the Facebook Like button below. Thanks!

Recent Articles

  1. Dow Jumps Higher After Trade War Pause, Will Markets Go Even Higher?

    Dec 03, 18 08:16 AM

    With an agreement to pause the trade war, Dow is about to jump 450 points higher, but will this rally sustain and go even higher? Lets take a look at the charts.

    Read More

  2. Bull Run To Year End In US Market? It All Depends On This...

    Nov 29, 18 07:51 AM

    Yesterday we saw a huge big rally 600 ++ points. The question now is this rally sustainable and will we have a beautiful Christmas in the stock market this year. Here are a few things to look out for…

    Read More

  3. Technical Analysis Of KLCI 29 November 2018

    Nov 29, 18 07:35 AM

    This sideways movement in the KLCI is really giving investors and traders a headache. What we are experiencing now is a volatility contraction which is often followed by volatility expansion.

    Read More

  4. Nasdaq Tries To Bottom But Still Faces Selling Pressure Nov 26 2018

    Nov 26, 18 08:52 AM

    As the techs reach an area of long term support, its going to be a choppy ride as the market decides whether support will hold or the downtrend continues...

    Read More

  5. Stock Market Analysis October 30 2018

    Oct 30, 18 06:35 AM

    As we close out the month of October 2018, what is in store for us? Let us take a look at the charts and see what they might be telling us.

    Read More

New! Comments

Have your say about what you just read! Leave me a comment in the box below.